Stock Options With Fixed Exercise Prices

Stock Options With Fixed Exercise Prices Table of Contents (Jump to) 1 Introduction 2 Fixed Price Options versus Indexed Options 3 Case for Indexed Options 3.1 Compensation for Relative rather than Absolute Performance 3.2 Protection of Managers during Market Downswings 3.3 Reduced Expected Costs 4 Case against Indexed Options 4.1 Unpredictability 4.2 Difficulty in Controlling Compensations 4.3 Larger Deadweight Costs. 4.4 Tax Treatment 4.5 Reluctance of Managers 5 Reasons for Choosing Alternatives of Indexed Options 5.1 Requirements of Firms 5.2 Sensitivity of Payoff 6 Empirical Evidence 7 Conclusion 8 References 1 Introduction The principal-agent problem has long been a matter of discussion within organisational institutions. As a matter of fact, the owners of a limited company normally elect a Board of Directors to control the business’s resources on their behalf. However, conflict arises among these managers and shareholders due to their different objectives. As owners, shareholders would want to maximise profits while managers may want to maximise sales, build empire buildings and enjoy perks. To align the interests of both stakeholders therefore, compensation of managers should be linked with the firm’s performance. One way to do this is the introduction of options: fixed price options and indexed options. Basically, an option is a financial derivative representing a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, just like a stock or bond, is a security. Fixed price options and indexed options differ significantly from each other. For the purpose of this assignment, we will discuss how indexed options provide a better case compared to fixed price options. 2 Fixed Price Options versus Indexed Options Fixed price options whose exercise price is already agreed upon and will remain the same until expiration date. The option exercise price is usually set equal to the stock price at grant. When an executive is given a fixed price option as a means compensation, two situations can arise. If the share price rises above the exercise price, the executive gains. On the other hand, the executive receive absolutely nothing if there is a decrease in share price In contrast, an indexed option is a stock option whose exercise price is connected to a benchmark index, which may be a specific sector index or a broad market index. Indexed price options have unknown selling price when contract is being made, and the final price of the option depends on market status on the expiration date. A change in the absolute value of the share will have no effect unless thecompanyoutperformssomestatedindex suchastheSP500 or a group of peers. Then only, the optionwillbeexercised. 3 Case for Indexed Options 3.1 Compensation for Relative rather than Absolute Performance Fixed price options reward performance in absolute terms. If the share price increases, the executives are rewarded in spite of rising market trends being unconnected to managers’ performance. Executives are still rewarded if competitors’ or the market have performed better. Similarly, when the share price falls, no rewards are given even if the firm did better than its peers. On the other hand indexed options reward relative rather than absolute performance. Hence, executives do not enjoy windfall gains by luck in rising markets, but by their performance instead. Only if the company performs better than the market or its peers that the executives can cash in. The executives have therefore further incentives to deliver good performance. The example below gives a better idea of how indexed options actually reward relative performance. XYZ ltd.’s equity stock is currently selling for $100 per share when the market (benchmark) index is at a level of 1000. XYZ limited grants an option to its CEO which enables him to purchase an option consisting of 100000 shares at an exercise price of $100, but the same will move in line with the market in future. Taking a specific case, the CEO is given indexed options. The value of the option granted to the CEO under 4 various scenarios is shown in the table below. Value of Indexed Option under Indexed Options SHAREPRICE INDEX Rises Falls Outperforms the index Index: 1150 (by 15%) Exercise price: $115 (by 15%) Stock price: $120 (by 20%) Value of option: $500,000 Index:850 Exercise price: $85 (by 15%) Stock price: $90 (by 10%) Value of option: $500,000 Underperforms the index Index: 1150 (by 15%) Exercise price: $115 (by 15%) Stock price: $110 (by 10%) Value of option: $0 Index: 850 (by 15%) Exercise price: $85 (by 15%) Stock price: $80 (by 20%) Value of option: $0 Table 1 From Table1, indexed options only reward the CEO when the companies’ stock outperforms the market, even if indexes have increased or decreased. They have a fair way of rewarding CEOs; they do not reward under-performingexecutives nor do they penalize superior performers whenever the market index has increased or decreased in respective cases. This is a convenient way of keeping CEOs motivated and thus encourage them perform well in their duties of decision making for a company’s investment. In general, indexed options reward superior performance under all market conditions. However, if the same example is taken in the case of fixed price option, and that there is a 5% change in the share price, the scenarios will differ as follows: Value of Option under Fixed Price Options SHAREPRICE RISES Exercise price: $100 Share price: $105 (by 5%) Value of option : $500,000 EXERCISE OPTION FALLS Exercise price: $100 Share price: $95 (by 5%) Value of option: $0 NOT EXERCISE OPTION Table 2 As shown in Table 2, when the share price increases from $100 to $105, the option is exercised to the benefit of the manager. The latter receives a compensation of $ 500,000. In the reverse case, when the share price falls to $95, the shareholders gets no compensation. 3.2 Protection of Managers during Market Downswings In the case of fixed price options, executives are not rewarded when the market is declining because share prices are below the exercise price. However, indexed options can well reward managers in bearish markets as long as the decline in the company’s stock price is less steep than that of his peers. Indexed options reward better performers. 3.3 Reduced Expected Costs Traditional options plans reward employees as long as the share price is higher than the grant price. However, indexed options eliminates the possibility that managers can be compensated for share price movements that are unrelated to what they might have done. Thus it helps a firm to remove or lower undeserved compensations. A study by J. Angel and D. McCabe values that the expense of providing conventional options to executives at the 100 largest NYSE-listed companies is 41 percent more than the expense of providing options that take out market outcomes. The lower expected costs against future earnings of indexed options compared to fixed priced options can only be to the advantage of companies. 4 Case against Indexed Options The advantages of indexed options over fixed price options are flagrant in light of the above. However, the application of indexed options is still rare. They lag behind fixed price options in many ways. 4.1 Unpredictability Unlike indexed options, fixed price options brings predictability and certainty to a transaction due to the fixed exercise price. Through the characteristic of ‘all or nothing’, the manager will exercise, and therefore make money, if and only if the firm’s stock price is above the exercise price. 4.2 Difficulty in Controlling Compensations Budgeting and forecasting business costs are made easier using fixed value plans. They allow for firms to plan and control how much compensation to offer to employees. Retention risk, in particular concerning non- executive staff members, can be largely minimised when compensations are close to that offered by rival companies. Indexed options, on the other hand, can cause large discrepancies in compensations and the loss of key employees. 4.3 Larger Deadweight Costs An indexed option plan has a greater deadweight loss compared to a traditional option plan. This is because, with agency problems, where the interests of owners and managers do not always line up, there is the need to expose the managers to firm-specific risk to encourage a specific type of behaviour. However, this means that they are unable to diversify their portfolios to their full potential, exposing them to both systematic and unsystematic risks while compensating them only for the systematic portion of risk. Consequently, managers will always value their equity-based compensation at less than its market value. 4.4 Tax Treatment So as to obtain favourable tax treatments, a company can grant incentive stock options. However, according to the 1994 US Code, this entails that the option price should be less than the fair market value of the stock at the time such an option is granted. In this case, it implies that the option price be fixed on the grant date. 4.5 Reluctance of Managers Managers are unwilling to accept a compensation plan based on relative performance. This is because in the case of fixed price options, when the stock market performs well, they reap high rewards for stock price performance unrelated to their own efforts. Managers are reluctant to forego the potentially huge rewards conferred by the bull market, especially when they estimate that a downturn is less likely to occur in the stock market. 5 Reasons for Choosing Alternatives of Indexed Options Besides, it should be noted that indexed options are not suitable in all cases. Some reasons are illustrated below and the corresponding alternatives are also suggested. 5.1 Requirements of Firms Compensation systems have the following functions: to compensate managers for completed work, to reduce principal-agent costs by more closely aligning managers interests with those of shareholders, and to retain the manager. Compensation that accomplishes one of these functions successfully may not carry out the other functions of a compensation system as effectively. Stock options, for instance, serve to align incentives. However, a firm where incentive alignment is not that important, would not be keen to use stock or stock options to compensate its managers. It would rather use cash compensation Cash avoids the deadweight costs that accompany any equity-based compensation plan. 5.2 Sensitivity of Payoff Indexed options do not work as expected in practice. Instead, their payoff tends to be highly sensitive to market price movements. As the market increases, the value of the variable-exercise-price option increases too. For example, Lisa Meulbroek of Harvard Business School shows that the estimated value of an option indexed to the SP 500 rises by 15% if that stock index rises by 15%. Clearly, indexing does not even achieve its aim; separating the general market movements from the movements in the value of the option. An alternative design that rewards managers only for performance and not for that is due to overall gains in the market or industry can be considered. Instead of using the firm’s stock as an underlying asset, an alternative design employs a performance benchmarked portfolio. Under this proposed structure, the value of the portfolio changes to reflect the firm’s performance, net of market and industry effects, while the exercise price remains fixed. (Meulbroek, 2001). 6 Empirical Evidence A brief empirical review will determine whether relative performance is compensated in practice. We also explore if indexed options are indeed better than fixed price options. According to Gibbons and Murphy (1990), chief executive officers are compensated upon relative performance. It was found that there is a positive and significant relationship between the remunerations of CEOs and the firm performance, but an inverse and significant one with the industry and market performance. On the contrary, Bertrand and Mullainathan (1999) report that CEOs are remunerated for market-wide and industry movements that they perceive as luck. However firms that are better managed reward their CEOs less for such market movements compared to other firms. Sloan (1993)’s also found that CEO compensation depends on earnings so as to help separate market movements from the reward. With regard to the effectiveness of indexed options, in their works titled â€Å"Indexing Executive Compensation Contracts† in 2013, Ingolf Dittmann, Ernst Maug and Oliver G. Spalt gave empirical evidence that indexed options provide incentives at a higher cost than conventional options. 7 Conclusion In light of the above, it is observed that stock options with fixed exercise prices do not properly link managers’ performance to compensation since they relate to absolute and not relative performance reward. Indexed options have higher incentive advantages over the fixed price option since it takes into account the skills of the executives. It is also highlighted that indexed options result in a lower compensation costs than equivalent fixed price options. Nevertheless, the drawbacks and suitability of indexed options should not be ignored either. As a result, a firm is well advised to properly weigh the costs and benefits of indexed options before applying them. 8 References Angel, J. and McCabe, D. (2002). Market-adjusted options for executive compensation. Global Business and Economics Review, 4(1), pp.123. Bebchuk, L. and Fried, J. (2004). Pay without Performance, The Unfulfilled Promise of Executive Compensation, Part III: The Decoupling of Pay from Performance. 1st ed. [ebook] Harvard University Press, p.24. Available at: http://www.law.harvard.edu/faculty/bebchuk/pdfs/Performance-Part3.pdf [Accessed 25 Sep. 2014]. Bertrand, Marianne, and Sendhil Mullainathan, (1999), Are CEOs Rewarded for Luck? A Test of Performance Filtering, (Princeton University, Mimeograph). Chandra, P. (2007). FINANCIAL MANAGEMENT. 1st ed. New Delhi: Tata McGraw-Hill, pp.947- 949. Dittmann, I., Maug, E. and Spalt, O. (2013). Indexing executive compensation contracts. Review of Financial Studies, 26(12), pp.31823224. Gibbons, R. and Murphy, K. (1990). Relative performance evaluation for chief executive officers, Industrial and Labor Relations Review 43, 30-51 Meulbroek, L. (2000). Executive Compensation Using Relative-Performance-Based Options: Evaluating the Structure and Costs of Indexed Options. SSRN Journal, [online] 01-021. Available at: http://dx.doi.org/10.2139/ssrn.281028 [Accessed 21 Sep. 2014]. Mueller, D. (2012). The Oxford handbook of capitalism. 1st ed. Oxford: Oxford University Press, p.386. Schnusenberg, O. and McDaniel, W. (2000). HOW TO VALUE INDEXED EXECUTIVE STOCK OPTIONS. Journal of Financial and Strategic Decisions. Sloan, R. (1993). Accounting earnings and top executive compensation. Journal of accounting and Economics, 16(1), pp.55100. Stapledon, G. (2004). THE PAY FOR PERFORMANCE DILEMMA. 1st ed. [ebook] U of Melbourne Legal Studies Research Paper No. 83, p.6. Available at: http://www.pay-without-performance.com/Stapledon-Pay-for-Performance-Dilemma .pdf [Accessed 25 Sep. 2014]. Symes, S. (2014). Advantages Disadvantages of a Fixed-Price Contract. [online] Small Business Chron.com. Available at: http://smallbusiness.chron.com/advantages-disadvantages-fixedprice-contract-21066.html [Accessed 23 Sep. 2014].

Role of Advertising in Newspapers

The Role of Advertising in Newspapers Revenues from sales of advertising pay for the bulk of the costs of newspaper production. That’s why the reading public pays so little for its newspaper. What is advertising? An advertisement is a message designed to sell the advertiser’s goods or services to prospective buyers. Types of newspaper advertising There are two types of newspaper advertising – display and classified. A display advertisement is a written message, often accompanied by an illustration or photograph, which can be placed in any section of the newspaper.A classified ad refers to those advertisements that are separated into specific classifications and located in one or more sections of the newspaper. Display advertisements There are two types of display ads found in the newspaper – national and local. National advertising usually refers to products that are promoted on a nation-wide basis, such as automobiles and brand-name products or retail cha ins. Local advertising is used to promote local, regional or national products. The ad is written, however, to appear in the local market.When placing a display ad, the advertiser is charged by the amount of space the ad occupies in the newspaper. The price of the space varies with certain factors: †¢Newspaper circulation (the larger the circulation the higher the price charged) †¢Size of ad †¢Use of colour †¢Guaranteed position in newspaper †¢Day the advertisement runs †¢Advertising frequency To attract a reader’s attention and to sell a product, many techniques are used in the creation of a display ad. As a result, these ads are usually professionally prepared in creative services departments of the newspaper, the advertiser or a contracted advertising agency.The physical appearance of an advertisement often determines its attractiveness to the reader. Some aspects considered in ad preparation are: †¢Size of the ad †¢Use of colour â⠂¬ ¢Amount of white space, i. e. , not too crowded †¢Graphics chosen †¢Type style and size of text The information included in an ad can definitely influence its effectiveness in selling a product. Some display ads are purely factual and appeal to reason. Information in these ads usually relates to: †¢Quality of the product †¢Price or value of the product †¢General description of the product Guarantee of the product Other display ads appeal to the emotions of the consumer and may emphasise: †¢Brand loyalty – the advertiser wants you to identify with and continue buying established brands. †¢Conformity – the â€Å"everybody is buying this particular brand or item† approach. †¢Hero worship – endorsement of a product by a personality in entertainment or sports. †¢Status – an appeal to the buyer’s ego. †¢Humour – entertaining, but deceptive; says little about the product. †¢Personal a ttractiveness – a wishful-thinking ad appealing to a particular feminine/masculine image. Style changes – the buyer is asked to keep up with the times. †¢Vanity – this kind of ad appeals to the buyer’s self image or ego-gratification where the buyer’s happiness comes first. †¢Economy – everyone likes to think he or she can economise while spending. †¢Luxury – symbols of wealth and excess. †¢Convenience – work and time-saving devices. †¢Lifestyle – the advertisement associates a certain lifestyle with a product. †¢Security – this covers many kinds of security: emotional, personal, financial, etc. †¢Sex – the ad uses the lure of sex appeal.It is similar to the appeals of feminine and masculine attractiveness. Keep in mind that more than one appeal may be found in the same ad. Classified ads Classified ads are not written by creative service departments, but by individuals wi shing to advertise goods and services available or needed. When placing a classified ad, advertisers are usually charged by the line. As a result, classified ads are brief. The price varies with the number of insertions desired and the particular days chosen. For example, the unit cost of an ad may decrease if it is run all week.On the other hand, a premium could be added to the cost if a high circulation day is chosen, such as Saturday. In some cities and towns different days are popular for certain types of ads. In your area, for example, Saturday may be a heavy real estate day, while Monday may be popular for car and truck ads. Placing a classified ad is very simple. One dials the classified advertising department of the newspaper and a trained operator assists in the placing of the ad. The operator will also help in the writing of the ad and in the selection of insertion dates.The process can also be done on-line. The classified ad section is organised to assist readers in locat ing relevant information. Many classified ad readers have specific goals in mind, rather than casual browsing. The classified ads – as their name implies – are grouped together according to product or service type. An overall index conveniently directs readers to each specific category, within which listings are arranged alphabetically. A newspaper is any printed periodical or work containing public news or comments on public news.Each newspaper tries to win the heart and loyalty of its readers through news and views, articles, pictures, poems, cartoons, editorials, presentation techniques and exclusive stories and news items. It censures the corrupt and the erring. It airs public grievances sad reflects public opinion through letters to the press. Napoleon feared four hostile newspapers more than a thousand bayonets. According to him â€Å"a newspaper is a grumbler, & censurer, a giver of advice, a regent of sovereigns, a tutor of nations. ‘ Gopal Krishna Gokha le considered the newspapers to be the rousers and the sentinels of the voice of people. In India newspapers have a vital role to play and an important duty to perform, both as ‘vox populi' (voice of the people) and as builder of public opinion. In this sense, it is the ‘people's university'—book, pulpit, platform, forum, theatre and counselor, all in one. There is no interest—literary, social, political, religious, commercial, economic, scientific, technological, agricultural, mechanical, cultural, histrionic and so on and so forth—which is not covered â€Å"by the news-paper.There, a vast majority of the people in this country are still illiterate or at least unenlightened, even among the literate persons, about two-thirds do not read newspaper regularly. The Indian masses lack intellectual capacity and comprehension required in reading a newspaper. Approximately 17 percent of people read newspapers and out these dot even half of the people read e ditorials, comments or serious initial articles. The rest content themselves by reading the headlines or the topical news.Young men read sports news and film reviews, the businessmen confine themselves to market reports about shares, stocks and the prices of gold, silver and essential commodi ¬ties. Only old, retired people pour over the newspaper from end to end, and that too because they have no other pastime to pass time. This shows that the number of those who have genuine interest in newspapers is very low. But it is these people—national and state leaders, teachers, lawyers, philosophers, academicians, technocrats and bureaucrats—who form the intellectual and intelligent section of the Indian society.They speak for the common people and voice their grievances against mismanagement of public affairs. They serve as a link between the rulers and the rated, the government and the people and complete the chain of action and reaction. The newspapers in India perform their pole as guardians of the public interest, watch-dogs and a source of all kinds of informa ¬tion. They are not State-controlled, as in U. S. S. R. and Pakistan, they enjoy freedom of expression. Of course, they must function within the bounds of law. They must not infringe the law regarding libel and deformation, otherwise they would be liable to penal action.Even the restricted freedom of the Indian newspapers it the envy of the journalists in other countries of Asia where there has been a prolonged spell of military dictatorship, autocratic rule or emergency. In India, the newspapers keep a powerful check on the mis ¬deeds, the tyranny and this, corrupt practices of the government. Thomas Jefferson paid rich tributes to this function of the newspaper when he said, â€Å"Were it left to me to decide whether we should have a government without newspapers, or newspapers without a government, I should not hesitate a moment to prefer the latter. However, all newspapers do not play a positive end construc ¬tive role expected of them. There is a section of newspapers in India, which indulges in blackmail, extortion of money and distor ¬tion of facts and news. This yellow journalism is despicable. Such newspapers violate all ethical standards and adopt a purely merce ¬nary and anti-national attitude. This is sub-standard and base Journalism. They should be treated like smugglers, black-marketers and drug-pedlars and antisocial elements and should be dealt with an iron-hand. What Jefferson said about newspapers in America applies to newspapers in India also. ‘I Chapter, truth; II Chapter, probabilities; third, possibilities; fourth, lies; fifth, blatant lies; and the first chapter is the shortest,† Most of the country's leading newspapers are owned or domi ¬nated by big industrial houses and capitalists—Birja, Dalmia, Express group, As a result, the interests of the general public are often sacri ¬ficed at the altar of capitalis m and business interests. Moreover, the lion's share of the total circulation of newspapers, a little above 5crore, belongs to the bigger dailies published from Delhi, Bombay, Calcutta and Madras, the metropolitan towns.The national dailies enjoy a great deal of influence and command huge resources. But the smaller newspapers, that are published in the regional languages and that have a smaller circulation, have to face perpetual financial crisis and are often forced to close down. This belies the Govern ¬ment policy of patronizing smaller newspapers and imposing rest ¬raints in bigger newspapers. In several countries abroad, especially in the West, newspapers have power to make and break governments; but in India news ¬papers do not carry much weight and do not cut much ice.The Government does not pay much heed to their views and does not respond to their criticism for the simple reason that it commands a colossal majority in the Parliament. Gloating over absolute majority, t he Government even tries to shifle free press (as has several times been done in the case of the Indian Express group of papers). One common method of pressurising newspapers that the Central or State Governments in India adopt is to stop giving adver ¬tisements and notifications released by the Directorate of Advertising and Visual Publicity (D. A. V. P. , Government departments and public sector enterprises; to such newspapers as do not cringe and adopt a fawning attitude and thus made them suffer financially. Advertisements are sometimes used as a weapon to corapell complia ¬nce, for it would be impossible for a newspaper to survive without advertisements, the prop and the life-blood of all journalism. A num ¬ber of such cases have been taken up in the Press Council of India and have been commented upon. Another method is that of stopp ¬ing or substantially cutting down the supply of newsprint paper quota to such ‘dare-devil' newspapers.Newspapers in this renaissanc e country should regard their pro ¬fession as a noble mission of educating and enlightening people. They should impose certain moral and national restraints and discipline upon themselves. They should refrain from indulging Its rumors and turning out biased information and distorted truths from ulte ¬rior motives. As purveyors of news and views, they should play the rote of ‘people's university' and serve the motherland as guardians and custodians of people's liberty.

Aggression And Its Effects On Schools - 1431 Words

Aggression in Schools Aggression remains a behavior between people from the same species that is aimed at causing harm or pain and is considered an initiator of violence. According to sources, there is an increase of violent acts in schools with the troubled students needing a habilitative service as compared to punishments (Dailey, Frey, Walker, 2015). It is essential to consider the fact that aggressive behaviors do not develop over a short period, thus its eradication as well would not be undertaken in a short time. It is critical to note that teachers remain wholly responsible for the developing and modeling of aggressive behaviors among students that occurs either positively or negatively (Dailey, et.al). Aggressive students are†¦show more content†¦These functions are mainly influenced by power and control, self-gratification, the pursuit of attention and escape. The primary purpose of aggressive behavior is to inflict, injure or gain something from an aggressor, a factor that apparently determines the need to find solutions into this vice. Farrell, Henry, Mays, Schoeny (2011) give the variable between instrumental and hostile aggression. In his literature, he alleges that the instrumental aggressions are the actions that are aimed at enforcing an extraneous reward rather than the suffering of an individual. An instance of this can be determined by a student who steals football boots from another student’s bag. On the other hand, hostile aggression infers to the actions that are committed to producing injurious outcomes through an approach aimed at gaining resources, power and status within a school environment. Aggressive behaviors range from verbal, nonverbal or physical acts that are aimed at causing a direct or indirect injury to a student with the aggressor seeking to gain from such conduct. A student’s body language may also depict an aggressive behavior in a manner that clearly depicts the element of anger, frustration, rage, humiliation among other feelings that warrant their aggressive behaviors (Farrell, et.al). An instance where a student shows a verbal behavior is always demonstrated

I Remember An Exchange Between Two Board Members Essay

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